The Importance of Climate Risks for Institutional Investors

These results are similar to the typical anatomy of engagement sequences analyzed in Dimson, Karakaş, and Li (2015), in which engagements most often start with discussions between management and shareholders and then potentially escalate.

“These results are also similar to the typical anatomy of the engagement sequences analyzed in Dimson, Karakaş, and Li (2015), in which engagements most often start with discussions between management and shareholders and then potentially escalate depending on how the initial discussions are received.”

• cites Dimson, Karakaş, and Li (2015) sourcePartly supported

  Section 2.1 (page unavailable) describes engagement sequences involving Raising Awareness—informing or warning target companies—and Requests for Change, a more stringent step. Section 3.3 (page unavailable) also characterizes Requests for Change as more aggressive. These passages support possible escalation, but they do not establish that engagements most often begin with management–shareholder discussions or that escalation depends on how those initial discussions are received. (LLM, conf=0.82)

  Experimental — accuracy not yet measured

Independent institutions are anticipated to be more involved in monitoring management.

“are therefore anticipated to be more involved in monitoring management”

• cites Ferreira and Matos (2008) sourceNot checked — no full text of the source
• cites Dyck et al. (2019) sourcePartly supported

  Section 4 says institutional investors can engage with management, and Section 4.2 identifies private engagement as a likely way they push for environmental and social changes. Table 7 separately examines independent institutional investors, but the copy does not say they are expected to monitor management more than other investors. (LLM, conf=0.83)

  Experimental — accuracy not yet measured

Independent institutions have fewer potential business relationships with portfolio firms.

“have fewer potential business relationships with portfolio firms”

• cites Ferreira and Matos (2008) sourceNot checked — no full text of the source
• cites Dyck et al. (2019) sourceCould not verify

  The Introduction and Section 5.6 discuss independent institutional investors’ financial incentives and exposure to social norms, but do not compare their potential business relationships with portfolio firms to those of other institutions. Searches for business relationships, business ties, and conflicts of interest did not locate a passage addressing that comparison. (LLM, conf=0.72)

  Experimental — accuracy not yet measured

Independent institutions are more likely to collect information.

“independent institutions are more likely to collect information”

• cites Ferreira and Matos (2008) sourceNot checked — no full text of the source
• cites Dyck et al. (2019) sourceCould not verify

  The Introduction and Table 7 discuss independent institutional investors’ effects on firms’ environmental and social performance, not whether those investors collect more information. Searches for “collect information” and related terms found no passage in our copy addressing that comparison; the data-collection description in Section 2.1 concerns the researchers’ data sources. (LLM, conf=0.75)

  Experimental — accuracy not yet measured

Institutional investors believe climate risks have financial implications for their portfolio firms.

“institutional investors believe climate risks have financial implications for their portfolio firms”

• Also stated in: § Abstract · boosted

  “The investors believe that climate risks have significant financial implications for portfolio firms.”

Respondents do not view climate risks as a theme of the distant future.

“our respondents do not view climate risks as a theme of the distant future.”

Many surveyed investors, especially long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks.

“Many of the investors, especially the long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks.”

Surveyed institutional investors believe climate risks, particularly regulatory risks, have already begun to materialize.

“these risks, particularly regulatory risks, already have begun to materialize”

• Also stated in: § Abstract · plain

  “50% state that climate risks related to regulation have already started to materialize”

Investors that are more concerned about the financial effects of climate risks engage firms along more dimensions.

“We find that investors that are more concerned about the financial effects of climate risks engage firms along more dimensions.”

The largest percentages of respondents (25% and 21%) consider stranded asset risk to be very high in the coal and unconventional oil producer sectors, respectively.

“We find the largest percentages of respondents (25% and 21%) consider this stranded asset risk to be very high in the coal and unconventional oil producer sectors, respectively.”

Divestment was the least used course of action when investors were dissatisfied with firm responses to their engagement, with only 17% exiting under such circumstances.

“divestment was the least used course of action when investors were dissatisfied with firm responses to their engagement (only 17% exited under such circumstances).”

Effects of regulatory and technological risks are seen as somewhat more important overall than physical risks.

“The effects of regulatory and technological risks are seen as somewhat more important overall than those of physical risks”

Successful engagements are reported by 25% of respondents.

“Successful engagements are reported by 25% of respondents.”

The perceived misvaluation of the oil sector, traditional car manufacturers, and electric utilities relative to other sectors seems modest.

“Yet, the perceived misvaluation of these sectors relative to other sectors seems modest.”

Only 16% of respondents had taken no engagement actions over the previous 5 years.

“We find a generally high level of engagement by our respondent group as only 16% had taken no engagement actions over the previous 5 years.”

Respondents on average rate the financial consequences of all three climate risks between 2.2 and 2.5.

“Table 2, panel B, shows that the respondents on average rate the financial consequences of all three climate risks between 2.2 and 2.5”

Institutions more concerned about the financial costs of climate risks use a wider range of tools to manage risks associated with climate change.

“Our cross-sectional analyses indicate that institutions more concerned about the financial costs of climate risks use a wider range of tools to manage risks associated with climate change.”

Figure 1A shows a widespread belief in climate change among respondents.

“The figure shows a widespread belief in climate change.”

North American respondents have more pessimistic expectations when it comes to the most extreme scenario.

“North American respondents have more pessimistic expectations when it comes to the most extreme scenario.”

Larger investors engage firms across a wider range of channels.

“Larger investors also engage firms across a wider range of channels”

Some respondents attempt to reduce the carbon footprints (29%) or stranded asset risks (23%) of their portfolios.

“Some of the respondents take these approaches one step further by attempting to reduce the carbon footprints (29%) or stranded asset risks (23%) of their portfolios.”

There is little evidence for a systematic link between investor characteristics and their beliefs about the mispricing of climate risks.

“We find little evidence for a systematic link between investor characteristics and their beliefs about the mispricing of climate risks.”

If portfolio firms did not respond to engagement or showed resistance, investors typically refrained from further actions rather than initiating more engagement, trying to hedge the climate risk issue, or divesting from the firm.

“If portfolio firms did not respond to engagement or showed resistance, then the investors typically refrained from further actions rather than initiating more engagement, trying to hedge the climate risk issue or divesting from the firm.”

Agreement is strongest for three motives: the protection of investors' reputations, their moral/ethical considerations, and their legal/fiduciary duties.

“Agreement is strongest for three motives: the protection of the investors' reputations, their moral/ethical considerations, and their legal/fiduciary duties”

Overall, there exists a large degree of confidence in expectations about global warming: 45% reported being relatively confident and another 34% more or less confident.

“Overall, there exists a large degree of confidence in expectations about global warming given that 45% reported that they are relatively confident in their expectations and another 34% are more or less confident.”

10% of respondents consider climate risks as the most important risk.

“We find that 10% of the respondents consider climate risks as the most important risk.”

There exists little cross-sectional variation in the investor types with the exception of two characteristics.

“there exists little cross-sectional variation in the investor types with the exception of two characteristics.”

No single motivation strongly commands investors' perspectives on the incorporation of climate risks into their portfolio decisions.

“Our survey demonstrates that no single motivation strongly commands investors' perspectives on the incorporation of climate risks into their portfolio decisions.”

Institutions with a greater proportion of ESG investments regard physical and technological climate risk as more financially relevant than do other investors.

“As would be expected, institutions with a greater proportion of ESG investments regard physical and technological climate risk as more financially relevant than do other investors.”

Respondents overall believe that climate risks have already become important concerns.

“Table 2, panel B, shows that the respondents overall believe that climate risks have already become important concerns.”

25% of respondents use some form of climate risk hedging.

“and 25% use some form of climate risk hedging.”

In Columns 1 to 3, the paper cannot detect that medium- or long-term investors differ from short-term investors in their perceptions of the importance of climate risk.

“In Columns 1 to 3 we cannot detect that medium-or long-term investors differ from short-term investors in their perceptions of the importance of climate risk.”

The paper does not find a systematic link between the importance of climate risk and the tendency of an institution to invest passively.

“We do not find a systematic link between the importance of climate risk and the tendency of an institution to invest passively.”

Some investors incorporate climate risks prior to making investments, especially through screening (24%).

“Some investors indicate that they incorporate climate risks prior to making investments, especially through screening (24%).”

Several differences exist across investors in terms of the perceived financial materiality of the three climate risk components.

“In Columns 4 to 6, we further find that several differences exist across investors in terms of the perceived financial materiality of the three climate risk components.”

Internet Appendix Figure 2 shows that for most investors incorporating climate risks is a relatively recent phenomenon.

“Internet Appendix Figure 2 shows that for most investors this is a relatively recent phenomenon.”

Investors employ a wide spectrum of approaches without one approach being strongly dominant.

“The responses also indicate that investors employ a wide spectrum of approaches without one approach being strongly dominant.”

Only a very small percentage (7%) of respondents had not taken any measures to incorporate climate risks into their investment processes in the previous 5 years.

“Strikingly, only a very small percentage (7%) of respondents had not taken any measures”

Investors with higher ESG shares rank climate risk closer to financial risk in terms of its overall importance.

“we do find in Column 3 that investors with higher ESG shares rank climate risk closer to financial risk in terms of its overall importance”

Larger investors do not differ from other investors in their assessments of the importance of regulatory and technological risks.

“However, larger investors do not differ from other investors in their assessments of the importance of regulatory and technological risks.”

Long-term investors find climate risks, in particular physical and technological risks, to be substantially more financially material than do other investors.

“Long-term investors find climate risks, in particular physical and technological risks, to be substantially more financially material than do other investors.”

Larger investors rank climate risks higher relative to other risks.

“We find as shown in Columns 1 and 3 that larger investors rank climate risks higher relative to other risks”

Very few respondents, less than 10%, believe that the three components of climate risk will have a delayed materialization of 10 years or more.

“Very few respondents, less than 10%, believe that the three components of climate risk will have a delayed materialization of 10 years or more.”

Large institutions consider physical risks as more financially material.

“Large institutions consider physical risks in Column 5 as more financially material”

32% of the respondents deal with climate risks by integrating ESG more generally into their investment processes.

“Thirty-two percent of the respondents deal with climate risks by integrating ESG more generally into their investment processes.”

A majority of the sample agrees that regulatory risks are already important concerns today.

“In fact, a majority of the sample agrees that regulatory risks are already important concerns today.”

The paper's investors have a higher propensity to engage over climate risks than to avoid it by divesting.

“We show in further analysis below that our investors have a higher propensity to engage over climate risks than to avoid it by divesting.”

More than half of the respondents that incorporate climate risks started to do so within the past 5 years.

“More than half of the respondents that incorporate climate risks started to do so within the past 5 years.”

21% of investors incorporated climate risks into their investment process in some form more than 10 years ago.

“21% incorporated the risks into their investment process in some form more than 10 years ago.”

More than 30% of investors believe that physical and technological risks are also relevant today.

“Fewer investors, but still more than 30%, believe that physical (and technological) risks are also relevant today”

Institutions tend to agree with the motive of incorporating climate risks due to a legal obligation/fiduciary duty (27%).

“Institutions also tend to agree with the motive of incorporating climate risks due to a legal obligation/fiduciary duty (27%).”

Investors with longer horizons engage in a wider range of tools to manage climate risks.

“Column 3 shows that investors with longer horizons engage in a wider range of tools to manage climate risks.”

Investors more concerned about the financial effects of climate risks are more likely to vote against management.

“Moreover, the investors that are more concerned about the financial effects of climate risks, and those that expect them to materialize earlier, are more likely to vote against management.”

Willingness to file a lawsuit because of climate issues is higher among larger institutions.

“The willingness to file a lawsuit because of climate issues is higher among larger institutions but otherwise unrelated to investor characteristics.”

Investors with more passive holdings tend to use fewer engagement channels.

“We find that investors with more passive holdings tend to use fewer engagement channels.”

Only 16% of respondents had not taken any actions to engage portfolio firms over climate risks in the past 5 years.

“Table 6 presents evidence of a generally high level of engagement by our respondent group: only 16% had not taken any actions over the past 5 years.”

Institutions with larger ESG shares are more likely to vote against management.

“The same holds for larger institutions and institutions with larger ESG shares.”

Larger investors engage firms along more dimensions.

“Further, as predicted, larger investors also engage firms along more dimensions (see Columns 4 and 5), although we have no evidence that long-term investors use more engagement channels.”

• Also stated in: § 7. Conclusions · plain

  “Larger investors generally engage firms along more dimensions.”

There is no evidence that long-term investors use more engagement channels.

“Further, as predicted, larger investors also engage firms along more dimensions (see Columns 4 and 5), although we have no evidence that long-term investors use more engagement channels.”

Targeted firms responded in most cases (71%) to the climate risk engagement by their investors.

“Targeted firms responded in most cases (71%) to the climate risk engagement by their investors (Figure 2A)”

Investors who consider the effects of climate change to be more financially material use more engagement channels.

“Consistent with our hypotheses, we find that the investors who consider the effects of climate change to be more financially material and use more engagement channels (see Column 1).”

A striking one-third of the investors used discussions to propose specific actions to management about the firm's climate policies.

“Table 6 also indicates that a striking one-third of the investors used these discussions to propose specific actions to management about the firm's climate policies.”

High-ESG-share investors focus primarily on active approaches to manage climate risks.

“Unsurprisingly, high-ESG-share investors focus primarily on active approaches to manage climate risks.”

Investors who deem climate risk as being more important do not distinguish between active and more passive approaches but use both approaches more broadly.

“The regressions in Columns 6 and 7 also show that investors who deem climate risk as being more important do not distinguish between active and more passive approaches but use both approaches more broadly.”

The typical response was acknowledging an issue rather than successfully resolving it.

“although the typical response was acknowledging an issue rather than successfully resolving it (Figure 2B).”

20% of respondents state that they publicly criticized the management of portfolio firms over climate risk issues.

“20% state that they publicly criticized the management of portfolio firms over climate risk issues”

18% of respondents initiated legal measures over climate risks.

“and 18% initiated legal measures over climate risks.”

Respondents used multiple channels to engage portfolio firms over climate risks.

“The respondents indicate that they used multiple channels to engage portfolio firms over climate risks.”

Investors with higher ESG shares are more likely to make shareholder proposals on climate topics.

“Column 9 shows that more investors with higher ESG shares are also more likely to make shareholder proposals on climate topics”

Conditional on performing some sort of climate risk management, the median investor in the sample uses three different approaches.

“Conditional on performing some sort of climate risk management, the median investor in our sample uses three different approaches.”

Investors more concerned about the financial implications of climate risks use a more diverse set of risk management tools.

“As expected, we find in Column 1 that investors more concerned about the financial implications of climate risks use a more diverse set of risk management tools.”

A similar fraction of respondents voted against management proposals because of climate risk concerns.

“and a similar fraction voted against management proposals because of climate risk concerns.”

Investors with a greater share of ESG-oriented investments use a wider variety of engagement channels.

“As expected, investors with a greater share of ESG-oriented investments use a wider variety of engagement channels.”

Investors who believe that climate risks are more important and will materialize earlier are also more likely to make shareholder proposals on climate topics.

“which is also the case for the investors who believe that climate risks are more important and will materialize earlier.”

Investors that expect climate risks to materialize earlier are more likely to vote against management.

“Moreover, the investors that are more concerned about the financial effects of climate risks, and those that expect them to materialize earlier, are more likely to vote against management.”

Long-term investors still use about 30% more tools than the median investor.

“In particular, long-term investors still use about 30% more tools than the median investor.”

More passive institutions have a lower propensity to engage in discussions with management.

“When we explore individual engagement channels, we find that more passive institutions have a lower propensity to engage in discussions with management (see Column 6).”

If portfolio firms did not respond to an engagement or showed resistance, investors usually gave up and did not take further actions (40%).

“Figure 2C further shows that if portfolio firms did not respond to an engagement or showed resistance, then investors usually gave up and did not take further actions (40%) (Question B4).”

The median investor in the sample engaged through two channels only.

“The median investor in our sample engaged through two channels only.”

A successful completion of a typical engagement is reported by 25% of respondents.

“A successful completion of a typical engagement is reported by 25% of respondents.”

There is no difference in the number of tools used between investors who expect climate risks to materialize sooner versus those that expect them to materialize later.

“In Column 2 we find no difference in the number of tools used between investors who expect climate risks to materialize sooner versus those that expect them to materialize later.”

Larger institutions are more likely to vote against management.

“The same holds for larger institutions and institutions with larger ESG shares.”

Investors with higher ESG shares use more climate risk management tools for their investments.

“Across Columns 1 through 5 we find that investors with higher ESG shares use more climate risk management tools for their investments.”

Only 17% indicate that they divested when being dissatisfied with portfolio firms' responses.

“Only 17% indicate that they divested when being dissatisfied with portfolio firms' responses.”

19% of respondents voted against the reelection of directors because of their handling of climate risks.

“19% voted against the reelection of directors because of their handling of climate risks”

Investors with medium investment horizons engage using more channels, with some evidence.

“Some evidence suggests, however, that investors with medium investment horizons engage using more channels (see Column 3).”

About one-third of the respondents have submitted shareholder proposals on climate risk issues.

“About one-third of the respondents have submitted shareholder proposals on climate risk issues”

Discussions with management were the most frequent engagement channel, with 43% indicating they had used the approach.

“Discussions with management were most frequent, with 43% indicating that they had used the approach.”

Institutions that expect climate to materialize earlier are more likely to propose specific actions to management.

“The institutions that expect climate to materialize earlier are more likely to propose specific actions to management (see Column 7).”

Independent institutions engage in a wider range of primarily passive tools to manage climate risks.

“In terms of our control variables, we find that independent institutions engage in a wider range of primarily passive tools to manage climate risks.”

Medium-term and long-term investors focus primarily on passive tools to address climate risks.

“Columns 6 and 7 show that medium-term and long-term investors focus primarily on passive tools to address climate risks.”

Larger investors manage climate risks more broadly.

“Consistent with our hypothesis, we find in Column 4 that larger investors manage climate risks more broadly.”

Relative sector mispricing is largest among oil firms, traditional car manufacturers, and electric utilities.

“The second principal finding is that relative sector mispricing is largest among oil firms, traditional car manufacturers, and electric utilities.”

• Also stated in: § 7. Conclusions · hedged

  “Overvaluations are considered to be largest among oil firms, followed by traditional car manufacturers, and electric utilities, although the magnitudes of the overvaluations seem to be modest.”

When investors engage portfolio firms over climate risks, they usually prefer private discussions with management.

“When investors engage portfolio firms over climate risks, they usually prefer private discussions with management.”

Investors that engage firms along more dimensions believe that climate risks are more underpriced.

“Second, investors that engage firms along more dimensions believe that climate risks are more underpriced, which may explain their engagement.”

• Also stated in: § 7. Conclusions · plain

  “Respondents with larger ESG shares, and those that engage portfolio firms along more dimensions, generally see more underpricing of climate risks.”

Investors with larger ESG shares generally view assets as being subject to more mispricing, especially underpricing.

“First, investors with larger ESG shares generally view assets as being subject to more mispricing (especially underpricing), possibly a reason that such investors promote ESG factors to begin with.”

• Also stated in: § 7. Conclusions · plain

  “Respondents with larger ESG shares, and those that engage portfolio firms along more dimensions, generally see more underpricing of climate risks.”

Mean valuation scores exceed zero for every industry sector included in the survey.

“In contrast, we find the mean valuation scores to exceed zero for every industry sector included in the survey.”

In the previous 5 years, 22.9% of survey respondents reduced stranded asset risk to incorporate climate risks.

“Reducing stranded asset risk 22.9 410 1-5, 13-14 Active”

In the past 5 years, 32% of survey respondents proposed specific actions to management on climate risk issues.

“Proposing specific actions to management on climate risk issues 32 406 1, 6-10”

Institutions that were not part of the panel more strongly agree that they incorporate climate risks because of financial and nonfinancial motives.

“In panel B we find high-ESG-share institutions, large institutions, and institutions that were not part of the panel more strongly agree that they incorporate climate risks because of financial and nonfinancial motives.”

In the past 5 years, 30% of survey respondents questioned management on a conference call about climate risk issues.

“Questioning management on a conference call about climate risk issues 30 406 1, 6-10”

In the previous 5 years, 25.1% of survey respondents submitted shareholder proposals to incorporate climate risks.

“Shareholder proposals 25.1 410 1-4, 12-14 Active”

In the previous 5 years, 24.6% of survey respondents hedged against climate risk to incorporate climate risks.

“Hedging against climate risk 24.6 410 1-4, 13-14 Passive”

High-ESG-share institutions believe that the financial materiality of the different sources of climate risks is higher.

“High-ESG-share and larger institutions generally also believe that the financial materiality of the different sources of climate risks is higher.”

In the past 5 years, 20% of survey respondents publicly criticized management on climate risk issues.

“Publicly criticizing management on climate risk issues 20 406 1-5, 9”

In the previous 5 years, 7.1% of survey respondents took none of the listed approaches to incorporate climate risks.

“None 7.1 410 1-12, 14 n/a”

High-ESG-share institutions more strongly agree that they incorporate climate risks because of financial and nonfinancial motives.

“In panel B we find high-ESG-share institutions, large institutions, and institutions that were not part of the panel more strongly agree that they incorporate climate risks because of financial and nonfinancial motives.”

Investors with longer horizons generally use a wider range of tools to manage risks associated with climate change.

“Investors with longer horizons generally use a wider range of tools to manage risks associated with climate change.”

In the previous 5 years, 25.6% of survey respondents used third-party ESG ratings to incorporate climate risks.

“Use of third-party ESG ratings 25.6 410 1-4, 12-14 Passive”

Investors more concerned about the financial effects of climate risks believe that stranded asset risks are higher among oil and natural gas producers.

“Notably, investors that are more concerned about the financial effects of climate risks believe that stranded asset risks are higher among oil and natural gas producers.”

Investors with larger ESG shares perceive higher stranded asset risks across most of the selected assets.

“As before, investors who engage firms more over climate topics, and those with larger ESG shares, perceive higher stranded asset risks across most of the selected assets.”

Larger institutions believe that the financial materiality of the different sources of climate risks is higher.

“High-ESG-share and larger institutions generally also believe that the financial materiality of the different sources of climate risks is higher.”

The perception of stranded asset risks is related to investor characteristics.

“Somewhat different from the cross-sectional analysis on mispricing, we find in Table 10, panel B, evidence that the perception of stranded asset risks is related to investor characteristics.”

High-ESG-share institutions have a higher propensity to conduct climate risk management and engagement.

“Consistent with this finding, panels C and D show that high-ESG-share and large institutions have a higher propensity to conduct climate risk management and engagement.”

In the past 5 years, 18% of survey respondents took legal action against management on climate risk issues.

“Legal action against management on climate risk issues 18 406 1-5, 9”

The regressions in Table 9 provide little evidence of a widespread systematic link between mispricing and investor characteristics.

“The regressions in Table 9 provide little evidence of a widespread systematic link between mispricing and investor characteristics.”

No single motive dominates the investors' explanations for why they incorporate climate risks into their investment processes.

“No single motive dominates the investors' explanations for why they incorporate climate risks into their investment processes.”

In the past 5 years, 19% of survey respondents voted against reelection of any board directors due to climate risk issues.

“Voting against reelection of any board directors due to climate risk issues 19 406 1-5, 9”

Investors with a higher share of passive investments perceive more stranded asset risk.

“Further, investors with a higher share of passive investments perceive more stranded asset risk.”

In the previous 5 years, 38.0% of survey respondents analyzed the carbon footprint of portfolio firms to incorporate climate risks.

“Analyzing carbon footprint of portfolio firms 38.0 410 4-14 Passive”

In the past 5 years, 43% of survey respondents held discussions with management regarding the financial implications of climate risks.

“Holding discussions with management regarding the financial implications of climate risks 43 406 2-10”

In the previous 5 years, 34.6% of survey respondents analyzed stranded asset risk to incorporate climate risks.

“Analyzing stranded asset risk 34.6 410 5-14 Passive”

In the past 5 years, 30% of survey respondents submitted shareholder proposals on climate risk issues.

“Submitting shareholder proposals on climate risk issues 30 406 1, 6-10”

Divestment is the least frequently used approach overall.

“Divestment is the least frequently used approach overall.”

Large institutions have a higher propensity to conduct climate risk management and engagement.

“Consistent with this finding, panels C and D show that high-ESG-share and large institutions have a higher propensity to conduct climate risk management and engagement.”

In the previous 5 years, 33.9% of survey respondents used general portfolio diversification to incorporate climate risks.

“General portfolio diversification 33.9 410 6-14 Passive”

Many investors still do not consider the basic approaches to identify and manage carbon and stranded asset risks.

“For example, many investors still do not consider the basic approaches to identify and manage carbon and stranded asset risks.”

In the past 5 years, 16% of survey respondents took none of the listed direct engagement approaches over climate risk issues.

“None 16 406 1-9”

The majority believes that climate risks, especially those related to regulation, have already started to materialize.

“Further, the majority believes that climate risks, especially those related to regulation, have already started to materialize.”

In the past 5 years, 30% of survey respondents voted against management on proposals over climate risk issues at the annual meeting.

“Voting against management on proposals over climate risk issues at the annual meeting 30 406 1, 6-10”

Participants with more confidence in their assessments of relative valuation show a slightly higher belief in mispricing.

“Those participants with more confidence in their assessments of relative valuation show a slightly higher belief in mispricing.”

The average response for coal sector stranded asset risk is 2.73 out of 4, suggesting a tendency for investors to believe that stranded asset risk is present in the coal sector.

“However, the average response is 2.73 (out of 4), which suggests that a tendency exists for investors to believe that stranded asset risk is present in the coal sector.”

Even for coal producers, only 25% of respondents believe that stranded asset risk is very high.

“Yet, even for the coal producers, which have the highest percentage of respondents believing that they face stranded asset risks, only 25% believe this risk is very high.”

In the previous 5 years, 23.7% of survey respondents used negative/exclusionary screening to incorporate climate risks.

“Negative/exclusionary screening 23.7 410 1-5, 13-14 Active”

In the previous 5 years, 31.7% of survey respondents used ESG integration to incorporate climate risks.

“ESG integration 31.7 410 6-14 Passive”

Survey respondents generally think that climate risks have important financial implications for their portfolio firms.

“We find that the survey respondents generally think that climate risks have important financial implications for their portfolio firms.”

In the previous 5 years, 29.3% of survey respondents reduced the carbon footprint of portfolio firms to incorporate climate risks.

“Reducing carbon footprint of portfolio firms 29.3 410 1-2, 10-14 Active”

Large institutions more strongly agree that they incorporate climate risks because of financial and nonfinancial motives.

“In panel B we find high-ESG-share institutions, large institutions, and institutions that were not part of the panel more strongly agree that they incorporate climate risks because of financial and nonfinancial motives.”

In the previous 5 years, 20.2% of survey respondents divested to incorporate climate risks.

“Divestment 20.2 410 1-8, 12-14 Active”

In the previous 5 years, 25.9% of survey respondents used firm valuation models that incorporate climate risk.

“Firm valuation models that incorporate climate risk 25.9 410 1-4, 12-14 Passive”

Investors who engage firms more over climate topics perceive higher stranded asset risks across most of the selected assets.

“As before, investors who engage firms more over climate topics, and those with larger ESG shares, perceive higher stranded asset risks across most of the selected assets.”

Climate expectation is negatively associated with regulatory climate risk (coefficient -0.28, t=-4.67).

“Climate expectation | -0.28*** | -0.47*** | -0.47***”

Institutions with high ESG shares were more likely than low ESG share institutions to analyze carbon footprint of portfolio firms (43% vs 24%).

“Analyzing carbon footprint of portfolio firms 43 24 *** 48 35 ** 33 58 ***”

Climate risk horizon is positively associated with rating stranded asset risk as 'very high' for coal producers.

“Climate risk horizon 0.34** 0.03 -0.19 0.07 0.06 0.17”

Climate risk engagement is positively associated with climate risk underpricing average across all sectors (coefficient 0.04, t=2.18).

“Climate risk engagement | 0.04** | | 0.03** | | 0.02 | 0.11 | 0.20***”

Assets under management is positively associated with the climate risk engagement index (coefficient 0.25, t=2.41).

“Assets under management | | | | 0.25** | 0.15** | 0.02 | 0.05 | 0.10*** | 0.19*”

ESG share is positively associated with the climate risk engagement index (coefficient 1.16, t=3.87 in model 1).

“ESG share (x100) | 1.16*** 1.43*** 1.37*** 1.24*** 1.06*** | 0.36 | -0.12 | 0.61** | 0.55”

The mean misvaluation score across all industries is 0.38.

“Mean (across all industries) | 0.38 | | | 12 | 3 | 0.41 | |”

Independent institution is positively associated with the climate risk engagement index (coefficient 0.37, t=2.87 in model 1).

“Independent institution | 0.37*** 0.37*** 0.35*** 0.38*** 0.36*** | 0.19 | -0.11 | 0.31** | 0.07”

Passive share is negatively associated with the climate risk engagement index (coefficient -1.04, t=-1.77 in model 1).

“Passive share (x100) | -1.04* -1.00** -0.97** -0.92** -1.04* | -0.88*** | -0.23 | -0.02 | 0.13”

ESG share is positively associated with climate risk underpricing average across all sectors (coefficient 0.28, t=2.78).

“ESG share (x100) | 0.28** | 0.29*** | 0.19** | 0.22** | 0.67 | 0.91* | 0.55”

Climate risk materiality is negatively associated with rating stranded asset risk as 'very high' for unconventional oil producers, conventional oil producers, and natural gas producers.

“Climate risk materiality -0.23 -0.60*** -0.66*** -0.57*** -0.18 -0.18”

Medium horizon is positively associated with the climate risk engagement index (coefficient 0.97, t=3.50).

“Medium horizon | | | 0.97*** | | 0.52 | 0.61* | -0.02 | 0.61* | 0.06”

Climate risk horizon is negatively associated with proposing specific actions to management on climate risk issues (coefficient -0.22, t=-2.08).

“Climate risk horizon | | -0.25 | | | -0.15 | 0.01 | -0.22** | 0.21** | -0.09”

Institutions with high ESG shares were more likely than low ESG share institutions to hold discussions with management regarding the financial implications of climate risks (45% vs 33%).

“Holding discussions with mgmt.regarding the financial implications of climate risks 45 33 ** 53 39 ** 38 59 ***”

Climate expectation is negatively associated with physical climate risk (coefficient -0.47, t=-6.75).

“Climate expectation | -0.28*** | -0.47*** | -0.47***”

Institutions with high ESG shares were more likely than low ESG share institutions to reduce carbon footprint of portfolio firms (32% vs 20%).

“Reducing carbon footprint of portfolio firms 32 20 ** 37 27 ** 26 42 ***”

Institutions with high ESG shares were more likely than low ESG share institutions to use ESG integration (37% vs 16%).

“ESG integration 37 16 *** 47 27 *** 19 78 ***”

Institutions with high ESG shares were more likely than low ESG share institutions to analyze stranded asset risk (39% vs 22%).

“Analyzing stranded asset risk 39 22 *** 48 30 *** 34 38”

Climate risk materiality is negatively associated with the climate risk engagement index (coefficient -0.56, t=-5.30).

“Climate risk materiality | -0.56*** | | | | -0.53*** | 0.05 | -0.09 | -0.47*** | -0.04”

Institutions with high ESG shares were more likely than low ESG share institutions to vote against management on proposals over climate risk issues at the annual meeting (35% vs 14%).

“Voting against mgmt.on proposals over climate risk issues at the annual meeting 35 14 *** 38 27 ** 28 38 *”

Climate expectation is negatively associated with technological climate risk (coefficient -0.47, t=-5.66).

“Climate expectation | -0.28*** | -0.47*** | -0.47***”

Institutions with high ESG shares were more likely than low ESG share institutions to use negative/exclusionary screening (28% vs 13%).

“Negative/exclusionary screening 28 13 *** 23 24 17 47 ***”

Increasing exposure to high temperatures reduces revenues and operating income.

“Pankrantz, Bauer, and Derwall (2019) provide evidence that increasing exposure to high temperatures reduces revenues and operating income”

• cites Pankrantz, Bauer, and Derwall (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The low relative rank of climate risks does not imply that climate risks are considered financially immaterial.

“However, this low relative rank does not imply that climate risks are considered as financially immaterial.”

Banks began to price carbon risk into their loans after the Paris Agreement.

“banks began to price carbon risk into their loans after the Paris Agreement (Delis, de Greiff, and Ongena 2019)”

• cites Delis, de Greiff, and Ongena 2019 sourceNot checked — no full text of the source

Growing evidence indicates that climate risks may be mispriced in financial markets.

“Growing evidence indicates that climate risks may be mispriced in financial markets (Hong, Li, and Xu 2019;Daniel, Litterman, and Wagner 2017;Kumar, Xin, and Zhang 2019).”

• cites Hong, Li, and Xu 2019 sourceNot checked — no full text of the source
• cites Daniel, Litterman, and Wagner 2017Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

• cites Kumar, Xin, and Zhang 2019 sourceNot checked — no full text of the source

The respondents' institutions are located throughout the world, which allows the study to provide a global perspective on the role of climate risks.

“The respondents' institutions are located throughout the world, which allows us to provide a global perspective on the role of climate risks.”

Climate risks have potentially large effects on investors' portfolio companies.

“Climate risks have potentially large effects on investors' portfolio companies.”

Extreme temperatures can adversely affect corporate earnings.

“Addoum, Ng, and Ortiz-Bobea (2019) show that extreme temperatures can adversely affect corporate earnings”

• cites Addoum, Ng, and Ortiz-Bobea (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Credit ratings and yield spreads changed for polluting firms.

“credit ratings and yield spreads changed for polluting firms (Seltzer, Starks, and Zhu 2019)”

• cites Seltzer, Starks, and Zhu 2019Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Physical, regulatory, and technological climate risks to portfolio companies have the potential to adversely affect outcomes for investment management clients, pension beneficiaries, and shareholders of institutional investors.

“These risks to portfolio companies, which can broadly be categorized into physical, regulatory, and technological climate risks, have the potential to adversely affect the outcomes for many investment management clients, pension beneficiaries, and shareholders of institutional investors.”

Extreme weather is reflected in stock and option market prices.

“Kruttli, Tran, and Watugala (2019) show that extreme weather is reflected in stock and option market prices.”

• cites Kruttli, Tran, and Watugala (2019) sourceNot checked — no full text of the source

Baldauf, Garlappi, and Yannelis (2019) and Bernstein, Gustafson, and Lewis (2019) show that expected sea level rises affect real asset values in coastal areas.

“Baldauf, Garlappi, and Yannelis (2019) and Bernstein, Gustafson, and Lewis (2019) show that expected sea level rises affect real asset values in coastal areas”

• cites Baldauf, Garlappi, and Yannelis (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

• cites Bernstein, Gustafson, and Lewis (2019) sourceNot checked — no full text of the source

In terms of geographic distribution, the respondents are more likely to work for institutions in North America and Europe compared to the universe of investors.

“In terms of geographic distribution, our respondents are more likely to work for institutions in North America and Europe, compared to the universe of investors.”

Respondents regard the financial materiality of climate risks to be somewhere between important and fairly important.

“which means that the respondents regard the financial materiality of climate risks to be somewhere between “important” and “fairly important.””

The authors are confident that in the vast majority of cases they have only one observation per institutional investor.

“we are confident that in the vast majority of cases we have only one observation per institutional investor.”

The low relative ranking of climate risks does not imply that the effects of climate change are perceived as financially irrelevant.

“The low relative ranking of climate risks does not imply that the effects of climate change are perceived as financially irrelevant.”

In 9% of the observations, the authors cannot exclude the possibility that respondents work for the same institutional investors, as identifying observations coincide.

“In 9% of the observations we cannot exclude the possibility that respondents work for the same institutional investors, as identifying observations coincide.”

Addoum, Ng, and Ortiz-Bobea (2019) find that extreme temperatures affect firm performance.

“Addoum, Ng, and Ortiz-Bobea (2019) find that extreme temperatures affect firm performance.”

• cites Addoum, Ng, and Ortiz-Bobea (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Most investors currently concentrate resources in the investment process on risks other than climate risks.

“It also reflects that most investors currently concentrate resources in the investment process on risks other than climate risks (Blackrock 2016).”

• cites Blackrock 2016Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Akey and Appel (2018) and Bartram, Hou and Kim (2019) show that pollution has real effects on firm decisions.

“Akey and Appel (2018) and Bartram, Hou and Kim (2019) show that pollution has real effects on firm decisions.”

• cites Akey and Appel (2018)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

• cites Bartram, Hou and Kim (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

For 87% of the observations, the authors have sufficient data to determine that none of the identifying characteristics coincide.

“for 87% of the observations, we have sufficient data to determine that none of the following identifying characteristics coincide: location, assets under management, institutional investor type, investor horizon, ESG share (10% variation in the variable), equity share (10%), and passive share (10%).”

Ilhan, Sautner, and Vilkov (2019) document that regulatory and technological climate risks increase tail risks in stock prices.

“Ilhan, Sautner, and Vilkov (2019), for example, document that regulatory and technological climate risks increase tail risks in stock prices”

• cites Ilhan, Sautner, and Vilkov (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The authors are unable to fully assess the potential response bias in their sample.

“We are unable to fully assess the potential response bias in our sample, such as how our responses would change if we had a random set of investors.”

The perception that climate risks matter financially conforms with evidence from studies that use archival data to examine the financial effects of climate risks.

“The perception that climate risks matter financially conforms with evidence from studies that use archival data to examine the financial effects of climate risks.”

Overall, these requirements result in the lack of existence of derivatives to engage in hedging for climate change.

“which overall results in the lack of existence of derivatives to engage in hedging for climate change.”

Environmental issues matter more for investment performance when institutions are long-term oriented.

“environmental issues matter more for investment performance when institutions are long-term oriented (Gibson Brandon and Krueger 2018).”

• cites Gibson Brandon and Krueger 2018Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The respondents' answers are consistent with the arguments of Weitzman (2012) and Barro (2013) that climate change corresponds to disaster risk.

“Moreover, their answers are consistent with the arguments of Weitzman (2012) and Barro (2013) that climate change corresponds to disaster risk.”

• cites Weitzman (2012) sourceNot checked — no full text of the source
• cites Barro (2013)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

About two-thirds of investors currently do not even use these basic approaches to manage climate risks.

“The flipside of these numbers is that they indicate about two-thirds of investors currently do not even use these basic approaches to manage climate risks.”

The lack of use of divestment is consistent with Bessembinder's (2017) analysis indicating significant costs to investors who divest fossil fuel companies.

“The lack of use of divestment is consistent also with Bessembinder's (2017) analysis indicating significant costs to investors who divest fossil fuel companies.”

• cites Bessembinder's (2017)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Recent research based on archival data suggests that long-term investors care more about ESG issues.

“recent research based on archival data suggests that long-term investors care more about ESG issues (Starks, Venkat, and Zhu 2018)”

• cites Starks, Venkat, and Zhu 2018Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Temperature-augmented long-run risk models imply that climate risks should be a bigger concern for long-term investors.

“Temperature-augmented long-run risk models, such as that of Bansal, Ochoa, and Kiku (2017), imply that climate risks should be a bigger concern for long-term investors”

• cites Bansal, Ochoa, and Kiku (2017)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The implied estimated differences in rankings of around one-half for physical and technological risks are economically sizeable.

“the implied estimated differences in rankings of around one-half for physical and technological risks are economically sizeable.”

The low percentage of investors who hedge climate risks may also be due to further difficulties to hedging pointed out by Engle et al. (2019).

“as well as further difficulties to hedging pointed out by Engle et al. (2019).”

• cites Engle et al. (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Shive and Forster (2019) document a positive association between firm-level pollution and pressure from short-term investors.

“Related evidence comes from Shive and Forster (2019), who document a positive association between firm-level pollution and pressure from short-term investors.”

• cites Shive and Forster (2019)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The low percentage of investors who hedge climate risks may be in part a result of the difficulty in differentiating among the uncertainty components of risk, ambiguity, and misspecification.

“The low percentage of investors who hedge climate risks may be in part a result of the difficulty in differentiating among the uncertainty components of risk, ambiguity, and misspecification (Barnett, Brock, and Hansen 2019)”

• cites Barnett, Brock, and Hansen 2019Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

A challenge to investor decision-making is that the horizon by which climate risks materialize is highly uncertain.

“A challenge to investor decision-making is that the horizon by which climate risks materialize is highly uncertain (Barnett, Brock, and Hansen 2019).”

• cites Barnett, Brock, and Hansen 2019Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Climate risks are likely to vary across industries depending on factors such as carbon emissions or stranded assets.

“This approach is supported by the prior research that indicates climate risks are likely to vary across industries, depending on factors such as carbon emissions or stranded assets (see Krueger 2015).”

• cites Krueger 2015Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The widespread use of private investor intervention regarding climate topics supports the interpretation that many investors first engage firms through negotiations and take public actions only once the private interventions fail.

“The widespread use of private investor intervention regarding climate topics supports the interpretation from their article that many investors first engage firms through negotiations and take public actions only once the private interventions fail.”

• cites McCahery, Sautner, and Starks (2016) sourceNot checked — no full text of the source

Most of the investors' actions appear consistent with the view that divestment would reduce investor influence to improve climate policies.

“Most of our investors' actions appear consistent with the view that divestment would reduce investor influence to improve climate policies.”

These numbers corroborate the prior result that climate risks usually do not trigger divestment, at least among most investors in the sample.

“These numbers corroborate our prior result that climate risks usually do not trigger divestment, at least among most investors in our sample.”

A number of institutional investors are actively involved with companies in combatting the problems from climate change.

“This result implies that a number of institutional investors are actively involved with companies in combatting the problems from climate change.”

Many investors first engage firms through negotiations and take public actions only once these private interventions failed.

“The widespread use of private intervention over climate topics implies that many investors first engage firms through negotiations and take public actions only once these private interventions failed.”

The survey covers only industries for which prior analysis indicates that climate change is likely to have a large effect.

“Because of space and time constraints for our participants, the survey does not cover all industries but only those for which prior analysis indicates that climate change is likely to have a large effect (Mercer 2015).”

• cites Mercer 2015Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The average respondent believes that the equity valuations of the sectors a priori most exposed to climate risk do not fully reflect this risk.

“Thus, the average respondent believes that the equity valuations of the sectors a priori most exposed to climate risk do not fully reflect this risk.”

• Also stated in: § 7. Conclusions · plain

  “The average respondent believes that equity valuations do not fully reflect the risks from climate change.”

Overall, the evidence indicates that investors consider climate risks as important investment risks.

“Overall, our evidence indicates that investors consider climate risks as important investment risks.”

Long-term and larger investors appear better prepared for the transition to a low-carbon economy.

“In general, the long-term and larger investors appear better prepared for the transition to a low-carbon economy.”

The survey responses may be biased toward investors with more developed climate risk policies.

“As we have an oversampling of larger institutions and institutions with more ESG funds, these differences support the possibility that our responses may be biased toward investors with more developed climate risk polices.”

Institutional investors consider climate risks both because of nonfinancial and financial reasons.

“These findings imply that institutional investors consider climate risks both because of nonfinancial and financial reasons.”